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Utilities Could Go The Way Of The Streetcar, Or Mimic One Industry That Survived

Unless electric utilities provide new services that customers want, they may go the way of the streetcar, which once ruled America’s cities but relied on regulators for protection from competition, according to a new paper from the nonprofit Energy Center.

Another industry offers a better model for surviving competition, writes Steve Kihm, director of market research and policy at the Energy Center of Wisconsin, with coauthor Elisabeth Graffy, in the spring 2014 issue of the Energy Law Journal (pdf).

“The way to survive a competitive onslaught is to offer customers something they want, not redesign pricing for the same service they have had for years,” said Kihm, who is speaking on the topic this week at the RE-AMP Annual Meeting in Chicago.

Streetcars offer a cogent example. They met most public transit needs in cities in the early 20th Century, serving 14 billion riders in 1920.

But in the next decade, buses and private automobiles devoured 35 percent of that ridership, and except for a brief recovery prompted by gasoline rationing in World War II, streetcars spiraled toward decline. By 1960, almost all streetcar utilities had stopped operating.

“Over this transition period, the streetcar utilities showed no real signs of innovation, essentially offering the same service to customers in 1950 as they had in 1920,” Kihm said—but appealing to regulators to reimburse their legacy infrastructure costs.

Some utilities have signaled a similar approach to the “death spiral” spurred by increasingly inexpensive rooftop solar.

Companies like Exelon acknowledge the threat:

“We’re faced right now with words like death spiral, and what that really means to ComEd is—it’s not going to happen soon, but think Eastman Kodak, think Smith-Corona, and you can go down the list of industries that didn’t adapt technologically,” said Tom O’Neil, senior vice president for regulatory and energy policy and general counsel for ComEd, an Exelon company.

But many are leaning on regulators to throw them a life preserver:

“You have to come up with a regulatory model that ensures you’re going to be able to preserve the integrity of the system,” said Ross Hemphill, the vice president of regulatory policy and strategy for ComEd.

Streetcars serve as a particularly cogent example because their plight resulted in a Supreme Court ruling that influences utility regulation today. In Market Street Railway v. Railroad Commission, the Supreme Court found that protections ordinarily afforded to utilities—such as the right to raise capital through reasonable rates, said Kihm, do not apply to utilities under intense competition.

“When markets enter a truly disruptive phase, the institutional provision utilities cherish the most—the right to be afforded a reasonable opportunity to earn a fair rate of return on their invested capital—may disappear,” Kihm said. “Utilities might not be able to attract investment capital, limiting their ability to function. Once a utility gets to this point, its ability to adapt would be essentially non-existent.”

Instead of following the trailed blazed by the streetcar utility, electric utilities might want to follow the model of the cable television industry. Facing intense competition from satellite television services, cable companies increased revenue by offering internet and telephone services, Kihm said.

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